Alexander Group Rule of Five Series for Higher Growth and Profitability

Driving Value: Alexander Group Rule of Five

Leveraging higher growth and profitability.

Alexander Group’s extensive and timely research indicates that manufacturers and distributors who adhere to the Rule of Five valuation model can consistently outpace competitors and enjoy premium valuations. Based on over 100 interviews with leading executives, revenue-focused client projects and industry research using hundreds of datasets, there are five key rules that will unlock the power of your commercial model. 

What Are the Five Rules of Above-Market Valuation?

Alexander Group is breaking up the five steps of our model to dive deeper into each stage. Explore these measures to learn how you can increase productivity and ROI regardless of your industry. The five steps of the model are below:

1. Front-line Sales Managers per Core Field Seller
2. Percent of Revenue from New Products
3. Percent of Revenue Invested in Digital Tools for Commercial Functions
4. Core Sales Team Attrition Rate
5. Sales-to-Revenue Operations Resource per Core Field Sellers

1. Front-Line Sales Managers Per Core Field Seller

Target: <10:1

In an uncertain business environment, some companies cut budgets, adopt “wait and see” approaches and stop investing in sales team oversights. These companies have sales managers with too many field sellers, leaving little time for strategy, direction and supervision. High ratios greater than 10:1 inhibit proactive selling, while low ratios (less than 5:1) can increase expenses and may be tied to immature player/coach selling models.

Alexander Group research indicates that companies optimizing their manager-to-seller ratio provide improved oversight and training while leveraging selling opportunities. Cross-functional collaboration, proactive customer outreach and strategy execution are ways sales managers add value, providing the guidance needed to expand both revenue and growth.

The positive effects of lower sales manager ratios are profound. Companies with ratios of 10 or fewer sellers per manager see:

• Almost 2% higher growth (1.9% versus .1%)
• 8% higher gross margins (41% versus 33%)
• $2.4M higher sales per core seller ($12.4M versus $9.0M)

Companies with higher spans of control outperform in only one category, expense to revenue ratios—spending 0.6% less in overall sales expenses (5.8% versus 6.4%). However, these savings are short-sighted and heavily outweighed by lower productivity, growth and gross margins.

How to Get There

Your first priority as a commercial executive should be bolstering your front-line sales management. Take the following steps to optimize your seller-to-manager ratio.

Analyze Sales Manager Operations

Map your organization and gain a true understanding of how many resources each sales manager is covering. You may think it’s only five or six, but it could be significantly higher if they support multiple channels, overlays and support resources.

Understanding the day-to-day operations of sales managers lets you uncover opportunities to maximize profitability. It’s possible some personnel are managing more resources than others. Balancing out responsibilities leaves less room for surprises in the workplace. Generate higher profits by ensuring sales managers are well-supported and aware of their duties—doing this reduces the chances of leads falling through.

Review Sales Manager Strengths and Weaknesses

Assess the true job profile and skill set of your sales managers. Do you have an overabundance of players/coaches or office jockeys who never get out in the field? Identifying the highest-achieving sales managers within a company helps you see who maximizes profitability versus who could use additional training to succeed.

A large part of learning how to increase profitability comes from figuring out sales manager strengths and weaknesses. You might have a handful of sales managers with outstanding attention to detail or great communication skills, but they lack experience with specific technology. Looking at the strengths and weaknesses of different professionals makes it easy to fine-tune group training sessions.

Organize Training Programs

Set up a talent and development program for sales managers. Know exactly how many you need to hire, where to source them (internal or external) and how to equip them to succeed in the long term. Training programs help set the bar for performance on the job. You can also get insight into sales managers’ common questions about daily tasks and operations.

Making sure new employees as well as those who have been with you for years have the same resources available sets you up to increase profitability. Training programs help workers complete jobs consistently and can increase worker confidence when learning something new.

Hire the Right People for New Positions

Hire up and get to at least a 10:1 ratio of fully dedicated, highly skilled and motivated sales managers who will help capture above-market growth and margins. You may be able to promote workers from within your organization. Your current employees should have a solid grasp of your mission and processes, which makes selecting people for sales manager openings straightforward.

When you require new talent, stay open to recruiting professionals in your area who bring new skills and ideas to the table.

Alexander Group recalls a past engagement where the team told a new commercial leader that his main issue in a severely underperforming company was the lack of sales managers. He needed 12 or so to get to a 10:1 ratio. He hired 20 and brought double-digit growth to a company with flat sales for five years straight. This is one example of how finding the right people for the job proved to be helpful in increasing profitability.

2. Percent of Revenue from New Products

Target: >10%

Technology advances are shrinking product lifecycles while competitors are quick to commoditize undifferentiated legacy products. It is very difficult to maintain share, much less grow above market without a robust new product pipeline. Added to the mix, and depending on manufacturing and distribution subsectors, service and software offerings can greatly expand growth opportunities.

Top performers use a four-pronged approach to achieve this leading benchmark:

1. Focused, strategic investments in product development and launches characterized by the results that your products and services deliver to the client
2. A strong culture of inclusion and collaboration between product development and the entire commercial team (Marketing, Sales and Service)
3. Detailed buyer journey mapping and voice of customer integration to the entire commercial ecosystem
4. Extensive sales team training and collateral, in addition to targeted incentives

Compared to less innovative firms who don’t reach the 10% new product target, innovation leaders achieve 2% higher growth, leading to 10%+ higher revenue over a five-year time span. Focused investments in Sales, Marketing and Service are the key to achieving high revenue and growth.

3. Percentage of Revenue Invested in Digital Tools for Commercial Functions

Target: 0.8% (and growing)

Manufacturers and distributors have been traditionally slower to embrace commercial technology than companies in other sectors but were forced to do so to keep pace with customer demands and the new dynamics of social distancing. Other than e-commerce, the current industry average is 0.4% investment as a share of revenue. However, industry leaders who invest 0.8% of revenue see much better results.

Enhanced data, improved customer insights, and automated, integrated revenue functions result from digital investments. Because of improved data, top-performing companies can assess customer and account needs, mapping critical points of digital interactions by segment. Top performers are using digital tools to integrate sales, marketing and service processes and data and continually evaluate which technology best serves the organization. Sales and Revenue Operations teams typically spearhead the implementation and support of these commercial digital applications.

Across all industries, our research indicates that companies who invest twice as much in digital tools as the norm are significantly more likely to meet their revenue targets and have 45% higher revenue growth than those who merely track the market. The additional 0.4% of investment can easily lead to a 500%+ return on incremental sales growth.

4. Core Sales Team Attrition Rate

Target: 10%

Alexander Group research shows that high attrition rates of 15% – 20% can indicate barriers to acquiring and developing key sales talent, resulting in inconsistent coverage for top customers. High attrition rates also correlate to misalignment in sales compensation, territories, workload and management. Low attrition of less than 5% can indicate complacency and lack of focus on critical growth strategies.

Top performers focus on new growth drivers that include new products and solutions, sales and digital channels, and selling roles. Hiring strategies include hire-to-retire programs for core commercial roles that require active recruitment with two or three year hiring plans through multiple channels. Consistent, 18-month training and development programs for all positions, supported by ongoing talent assessments and rigorous performance metrics, are also critical to a well-developed sales function.

Growth drivers, recruitment, training and talent development strategies lower attrition rates, lower sales costs, and provide moderately higher growth.

5. Core Field Sellers per Revenue (Sales, Commercial) Operations Resource

Target: 10:1

Companies that are not leveraging Revenue Operations (RevOps) teams (traditionally Sales and/or Commercial Operations) miss an opportunity to optimize customer segmentation, account planning, sales resource allocation, goal setting, and performance metrics. Without a centralized RevOps team, sales teams often lack coordination, which inhibits growth.

Top performers realize that a centralized and empowered RevOps team drives higher growth and lowers overall cost. Their RevOps functions focus on the highest impact needs, including strategy, efficiency and analytics. With RevOps as the central driver, they install a capable leader to build out the role, align with business strategy, and foster cross-functional collaboration.

RevOps is proving to be a critical investment for leading companies, resulting in a 23% lower expense-to-revenue ratio, 31% higher year-over-year revenue growth, and a 17% higher share of the revenue from new customers. Importantly, M&Ds with RevOps teams achieve more efficient sales-to-expense ratios even with the added resources and investments required to field the function.

REVOPS IS A CRITICAL INVESTMENT FOR LEADING COMPANIES

23% Lower Expense-to-Revenue Ratio

31% Higher Year-over-Year Revenue Growth

17% Higher Share of the Revenue From New Customers